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At whisky tastings, drinkers are often asked to look at colour and clarity to determine quality. Diageo’s annual results provide plenty of information on colour and clarity, with director Debra Crew calling the consumer environment “extraordinary” as the drinks category has endured. Global sales fall for first time since 2020.
But there was little clarity on when conditions might improve. A vague statement about how the Johnnie Walker Scotch maker was “confident that organic net sales growth will return as the consumer environment improves” was not well received, sending shares down 7 percent on the day.
Crew has a broader problem than a cyclical downturn. Some investors are still hurting because Shock Profit Warning in November, due to high inventories and weak consumer demand in Latin America — something Diageo should have recognized much sooner. The combination of uncertainty and distrust in management made for a nasty mix for Crew.
On the one hand, she may feel vindicated after the events of recent weeks. Other consumer companies are starting to report declining sales, something that happened much earlier in the U.S. spirits market. According to the IWSR, the volume of spirits sold in the United States fell in 2023 for the first time in nearly 30 years.
That is not possible Diageo but has been out of trouble. Last year, the company reacted slowly to a sharp decline in Scotch whisky sales in countries like Brazil and Mexico, still pushing products onto the market when they could not be absorbed.
Crew has sought to remedy this. She said inventory levels in Latin America are now back to a more “appropriate” level relative to demand.
The big concern now is the US, where Diageo gets nearly 40 per cent of its sales. Organic net sales fell a worse-than-expected 3 per cent in the year to June 30, hit by a weak consumer environment. Crew said earlier this year that could last six to 18 months. This time, she was reluctant to commit to a timeline.
Diageo has some positives to celebrate. Assuming earnings guidance is down by a single digit after its latest results, it’s still cheap — trades at around 16 times forward earnings. That compares with an average of nearly 18 times for the entire European region. Defending market share in key regions will give the company an advantage when the rally comes.
But it requires investors to just shut their mouths and drink for an indefinite period of time — and that’s enough to make anyone feel sick.
